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Tuesday, August 9, 2016, 23:27

Gatekeepers’ tug of war — HK’s listing mechanism on the edge

By Luo Weiteng
Gatekeepers’ tug of war — HK’s listing mechanism on the edge
The Securities and Futures Commission’s plan to reform the city’s listing mechanism has drawn a backlash from the bourse operator, brokerages, accounting firms and banks, which will bear the brunt of the “tightened” regulatory grip. (Justin Chin / Bloomberg)

A high-profile tug of war over the controversial plan to overhaul Hong Kong’s listing regime has highlighted the inherent divergence between the city’s securities watchdog and the bourse operator, pointing to the daunting task of striking a delicate balance between market development and regulatory concerns.

Anthony Francis Neoh, former chairman of the Securities and Futures Commission (SFC), has waded into the controversy after the contentious listing proposal drew a chorus of criticism from Hong Kong Exchanges and Clearing (HKEx), industry heavyweights, listed companies and banks.

Neoh, a senior counsel, said on Monday he was surprised to see such an issue flaring up this far, adding that the market’s overreaction reflected an alarming lack of mutual trust.

The overhaul plan, he pointed out, would only extend the SFC’s function as a gatekeeper and supervisor, bringing about minor rather than fundamental changes to the current listing regime.

In June this year, the two regulatory bodies proposed the setting up of two new committees on which the SFC and HKEx would be equally represented, to streamline decision-making and the governance structure for local company listings.

Under the existing supervision structure, although the SFC does have the power to reject listing applications and policies made by the exchange company, it’s HKEx’s listing division that has a direct say in clearing an application before passing it on to the listing committee for final approval.

The new committees would lend the SFC more leverage to supervise initial public offering (IPO) applications in the early stages, while HKEx would continue to be the frontline regulator for listing matters.

At the heart of the proposed overhaul is a consensus that the listing criteria should be modified amid mounting fears that the stock exchange will be reduced to a “factory for shell companies”. But, the conflicting views still revolve around how far the revamp can go, as well as the potential side effects.

The plan has drawn a backlash from HKEx, brokerages, accounting firms and banks, which will bear the brunt of the “tightened” regulatory grip.

Vincent Kee Kwan-ho, HKEx’s independent non-executive director, warned that raising the listing threshold may put Hong Kong’s reputation as a financial hub in jeopardy. “Does it make any sense that one sets the bar too high and would not tie the knot until every certain criterion has been met, simply due to the fear of a divorce afterward?” he asked.

Lo Ka-shui, vice-chairman of the Chamber of Hong Kong Listed Companies, cautioned that the reform plan may only allow the SFC to assume overwhelming powers without improving the quality of Hong Kong-listed companies too much.

“The proposed reform would kill off Hong Kong’s IPO market,” he said.

The Hong Kong Institute of Financial Analysts and Professional Commentators argued that the industry does have a point in worrying that “a morass of over-regulation” may reduce Hong Kong’s stock market, which is on track to retain the world’s largest IPO crown this year, to a “pool of stagnant water”.

The London Stock Exchange (LSE) and the Singapore Exchange are, possibly, lessons for Hong Kong. The former — Europe’s largest bourse — was stripped of the power to grant listing approvals in 2000, with the Financial Service Authority taking the helm in this area. The Singapore bourse handed over the power of approval to an independent authority akin to the SFC the same year.

The result was companies turning away from both financial centers and migrating to other prospective listing destinations. New listings on the LSE fell from 477 in 2000 all the way down to 283 a year later.

Meanwhile, the Singapore Exchange, once on a par with its Hong Kong counterpart, has dropped out of the world’s top 15 stock markets in terms of market capitalization, according to the World Federation of Exchanges. Last year, the Lion City’s bourse saw a turnover of roughly 95 percent less than that of Hong Kong’s. So far this year, only five companies have debuted on the main board of the Singapore exchange, raising S$1.92 billion ($1.43 billion).

Francis Lun Sheung-nim, chief executive of GEO Securities, said disclosure underpins Hong Kong’s approach to regulating securities markets. He said such a disclosure-based approach is designed out of fear for excessive administrative intervention and in the belief that investors can protect their own interests, with rule-makers appropriately lifting disclosure requirements in response to any corporate scandal or systematic failure.

What rattles market nerves most is the worry that policymakers may go against the city’s market-driven disclosure-based system, which is in line with the global trend, and lean toward a regulatory-dominant, approval-oriented system. This would be a setback for the financial center, coming at the expense of Hong Kong’s status as the world-renowned magnet for new listings, Lun warned.

In a rare public rebuttal last week, SFC Chief Executive Ashley Alder hit back at critics, making it clear that the SFC does not intend to expand its domain of power, adding that the reform plan would not reduce HKEx’s listing division to a rubber stamp.

The securities watchdog reiterated it would take into account the number of objections, and examine whether the dissenting views are reasonable and well-founded.

Lun said the reform program is just the reemergence of failed efforts back in 2003, when the SAR government proposed making the SFC the sole and only approval authority for company listings, leaving HKEx a mere operator of the city’s stock market. But, the idea ran aground amid vehement opposition from HKEx, with the exchange company ending up as the authority to vet and approve IPOs, and the SFC playing the role of voicing objections and holding the ultimate veto power, he said.

This time round, heightened concern over a hive of unregulated market activities and the deteriorating quality of listed companies appear to have pushed the SFC to reignite the plan.

“Extending the SFC’s powers does not mean it will abuse them. This is purely a groundless assumption,” said Hannah Li Wai-han, a strategist at UOB Kay Hian (Hong Kong).

According to Alder, merely 10 percent of all listing applications, usually complicated and abnormal cases, would be handled by the newly established regulatory committees, based on past experience.

Having seen the city’s stock market flooded with companies that are listed as manipulative stocks from the very first day and eventually ending up as shell firms waiting to be taken over, Li believed the market really needs an impartial quality checker.

“Basically, effective gate-keeping matters a lot,” said Dominic Wu Sze-yin, chairman of Hong Kong-based Asia Financial Risk Think Tank.

Citing the “milestone case” involving mainland textile maker Hontex International Holdings, which was eventually delisted after the regulator accused it of misleading investors, Wu said it’s always better to weed out the “bad apples” at the start rather than taking remedial measures after they’ve got listed and problems start to emerge.

Wu believed that Hong Kong’s position as a key IPO destination does not lie with the amount of funds raised or the number of new listings — the quality of listed companies is of top concern, and really has a stake in the sustainable growth of the local stock market.

Yet, analysts noted that the inherent divergence between the securities regulator and HKEx makes the infighting over the listing reform plan far from over. “What remains a matter of serious concern is HKEx’s dual role as a profit-making company and regulator,” said Li.

The years-long issue dated back to 2000 when HKEx listed itself on the Hong Kong Stock Exchange, provoking questions as to how the exchange company could strike a delicate balance between its conflicting roles of a “referee” and a “player”.

In the following years, controversies surrounding the local stock market had thrusted conflicts of interest into the spotlight.

A classic example was the so-called “penny stocks” crisis in 2002 when shares of some 17 companies lost more than 30 percent of their value, with HK$6 billion wiped off the value of 105 listed firms.

Critics claimed that HKEx’s aborted proposal to delist penny stocks trading below HK$0.5 for 30 straight days originated from the fact that penny stocks had been neglected small-revenue contributors to the exchange, but had taken a disproportionate amount of staff resources.

“The split continues to be there. But, we have to walk a tight rope between market development and regulatory concerns,” said Wu.
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